Emergency Services Inc. (ESI) intends to acquire a small fleet of ambulances. ESI has received a competitive proposal from Betterbilt Ambulances, totaling $1 million. Betterbilt is offering an attractive financing option, a no-money-down loan with a 10 percent interest rate. This loan spans five years, with annual payments due at the end of each year. These ambulances belong to the MACRS five-year class, with depreciation percentages as follows: 0.20, 0.32, 0.192, 0.1152, 0.1152, and 0.0576. Furthermore, they are expected to have a scrap value of $200,000, and annual maintenance costs are projected at $10,000.

Alternatively, ESI can opt to lease the ambulances, with annual payments of $205,000, beginning at the start of each year. The lessor assumes responsibility for all maintenance costs.

ESI faces a 6 percent cost of capital and is subject to a 21 percent corporate income tax rate. We will assume maintenance costs are paid annually at year-end if the assets are owned, and we'll apply the same discount rate to all cash flows. We will analyze the financial implications of owning and scrapping the ambulances after five years versus leasing them for the same duration.

a. What is the present value of the cost of ownership for ESI?

b. What is the present value of the cost of leasing the ambulances for ESI?

c. Should ESI opt to lease or purchase the asset?